PE Week Wire: Monday, October 13, 2008

Tech bloggers and venture capitalists have finally emerged from their self-congratulatory cocoon, and recognized that they are not immune from the financial meltdown. It’s a couple of weeks tardy, but better late than never (plus, everyone was preoccupied with that orbit-shifting Facebook redesign)…

Most of the newfound focus has been on stemming portfolio company spend, so let me suggest the next two story lines.

1. VCs will stop funding many of their existing portfolio companies.

Venture capitalists are typically loathe to cut bait, instead preferring to keep pro rata lines in the water. Part of this habit is deep faith in the original investment thesis, while another part is an understandable aversion to guaranteeing nothing in return for something. Plus, most VC firms have had plentiful dry powder with which to make small follow-on investments.

But this is going to change, and change soon. First, the outlook for near-term and medium-term liquidity events is bleak, thanks to a nonexistent IPO market and a miserly M&A market. That chips away at optimism, and forces VCs to focus their attention on those companies that can hold out the longest.

Second, available fund powder is no longer a given. Many VC firms have gotten used to raising new funds every few years, but the denominator effect and lack of distributions will severely limit venture fund-raising over the next 12 to 18 months. As such, firms will have to be more judicious with their capital.

One way to do that, of course, is to simply write off a wide swarth of existing investments. From what I hear, the process is already beginning.

2. Many dotcom-era VC firms will finally die.

This story line may seem anachronistic, since conventional wisdom is that the VC market experienced its post-dotcom shakeout years ago. It’s true that there was some bloodletting in the earlier part of this decade, but most of it was for latecomers who didn’t have strong 1998/1999 vintage funds to offset the disastrous 2000/2001 vintage funds. Many firms with at least two funds under their belts managed to survive, promising LPs that the first fund was far more presentative of their investment prowess than was the second fund (“return to basics, blah blah blah).

This latter group has been hanging around for years, in hopes of some positive event that could help justify another fund-raise. These are Web 1.0 folks, and there is little light left in their tunnels. If the last recession forced a shakeout, the coming one will be more like a barrel going over Niagara Falls. Expect to see some once-prominent names — plus a few that still claim prominence — go over the edge…

*** Alan Patricof, on the other hand, thinks that a lot of the doom and gloom is overstated. In a column published by PaidContent (Patricof’s Greycroft Ventures was an investor before selling to Guardian Media), he writes:

“The comments made by the partners of Sequoia Capital at their recently held ‘CEO Summit’ have been widely covered by leaks to numerous bloggers. These bloggers have disseminated the details and spread the contagion of the sentiments to the public at large, unfortunately running the risk that the words become a self-fulfilling prophesy.Without challenging the comments, which expressed a heightened degree of doom and gloom for the economic prospects of young start-up companies particularly, I do think it calls for a somewhat more restrained response on the outlook and required action before throwing the baby out with the bath water.”

Kind of reads a bit like shooting the messenger, so now is probably a good time to tell you that I’ll be interviewing Patricof as part of the North American VC Summit on Oct. 28 in Quebec City. He’ll give a 20 minutes speech, and then I’ll do a 20 minutes Q&A with him. Later that same afternoon, I’ll do the same thing with David Rimer of Index Ventures. In between will be a luncheon keynote from Steven Schwarzman. Get more info here.

*** Speaking of Schwarzman, a detail from Friday’s column about Blackstone Group was incorrect. The firm’s new fund is maintaining its minimum commitment at $20 million, although it may go down to $10 million for those who Blackstone is particularly fond of. My information was likely based on folks who are buying in via feeder funds. Dumb mistake, and apologies to you dear reader. Oh, and apologies to the Blackstone receptionists, who apparently got more than a few interested inquiries…

Top Three

Huntsman Gay Global Capital has bought Turner Bros. Holdings LLC from Saw Mill Capital for an undisclosed amount. Turner is a Houston, Texas-bhased provider of lifting and transportation solutions to the U.S. industrial and energy markets. Edgeview Partners managed the sale process.

Sichuan Zhiquan Special Cement, a Chinese cement maker, has raised $40 million in convertible preferred stock financing co-led by Merrill Lynch and Lunar Capital Management. Eos Asia Investments served as placement agent, and “is preparing the company for a possible overseas IPO in 2010.”

MobUI, a Redmond, Wash.-based mobile applications development startup, has acquired Action Engine Corp., a Bellevue, Wash.-based mobile apps company that had raised over $60 million in VC funding. MobUI said that it was financing the deal via a capital infusion from undisclosed investors, but did not say if Action Engine backers would become shareholders in the new company. Action Engine had been funded by Baker Capital, OVP Venture Partners, Northwest Venture Associates and Spangler Ventures.

VC Deals

JinkoSolar Holding Co. Ltd., a Chinese developer of silicon wafers for use in solar paneling, has raised $35 million in Series B funding. Backers include CIVC, Shenzhen Capital Group Co. and Pitango Venture Capital.

Sequoia Communications, a San Diego-based fabless RF semiconductor company, has raised around $10.1 million in Series F funding, according to a regulatory filing. The only listed shareholders are existing backers BlueRun Ventures and Tallwood Venture Capital. The company had previously raised approximately $63 million since 2000.

Simbionix USA Corp., a Cleveland-based maker of virtual reality simulation products for clinical education and the training of medical professionals, has raised around $7 million in Series C funding. River Cities Capital Funds led the round with a $5 million infusion, and was joined by placement agent Western Reserve Partners and return backer Early Stage Partners.

AcelleRX Therapeutics Inc., a Cleveland Clinic spinout that develops post-heart attack drugs, has raised $6.9 million in first-round funding. Triathlon Medical Ventures led the round, and was joined by Early Stage Partners, Fletcher Spaght Ventures, Reservoir Venture Partners, Blue Chip Venture Co. of Cincinnati, JumpStart Inc. and North Coast Angel Fund.

ISE Corp., a Poway, Calif.-based developer of hybrid-electric drive systems and control software, has secured $5.5 million of a $25 million Series D round, according to a regulatory filing. Siemens Venture Capital was joined by return backers Natural Gas Partners and Rockport Capital Partners. ISE had previously raised around $38 million since 2004.

Blurb Inc., a San Francisco-based provider of self publishing software and services, has raised around $5 million in Series C funding, according to a regulatory filing. Return backers include Canaan Partners and Anthem Venture Partners. It had previously raised around $14 million, plus $2.5 million inventure debt from Hercules Technology Growth

AdaptiveBlue, a Livingston, N.J.-based provider of a research and organization plug-in for the Firefox browser, has raised $4.52 million in Series B funding, according to a regulatory filing. Shareholders include Union Square Ventures and Biltmore Ventures (managed by Knightsbridge Capital Partners).

Twofish Inc., a Palo Alto, Calif.-based developer of digital resource planning solutions, has raised $4.5 million in second-round funding. Triplepoint Capital was joined by return backers Rustic Canyon Partners and Venrock.

Project Frog, a San Francisco-based developer of sustainable modular buildings and building materials for educational institutions, has secured $4 million of an $8.6 million Series B round, according to a regulatory filing. Rockport Capital Partners is leading the deal.

Wix, a developer of an online application for creating Flash-based websites, has raised $3.5 million in second-round funding. Mangrove Venture Capital led the round, and was joined by Bessemer Venture Partners.

Fitbit Inc., a San Francisco-based developer of Web-based health and wellness monitoring solutions, has raised $2 million in first-round funding. True Ventures led the round, and was joined by SoftTech VC and a group of individual angels.

Kirkland North Inc., an Oakland-based online game startup, has raised $225,000 in seed funding. Harrison Metal Capital led the round, with Michael Dearing taking a board seat.

Buyout Deals

Bain Capital, Bridgepoint Capital and Clessidra are all expected to make an offer to buy Italian business information Cerved, which had 2007 EBITDA of €69.8 million. Bids are due next Monday.

CCMP Capital reportedly is in talks to invest “several hundred million pounds” into Premier Foods (LSE: PFD), Britain’s largest food manufacturer.

Linens ‘n Things has received a stalking horse bidder for its assets, from a group that includes Hilco Merchant Resources, Gordon Brothers Retail Partners, Hudson Capital Partners, SB Capital Group, Tiger Capital Group and Great American Group. The Apollo-backed retailer is currently in Chapter 11 bankruptcy protection.

PCCW has ended the auction for a stake in its new HTK business, which had drawn interest from firms like Apax Partners, Bain Capital, Carlyle Group, and Providence Equity Partners.

PE Exits

Standard Life PLC has acquired Vebnet Ltd., a Scotland-based provider of virtual employee benefits services, for £24 million. Sellers include Cross Atlantic Capital Partners.

Firms & Funds

SSM Partners, a Memphis, Tenn.-based VC firm focused on expansion-stage companies, is raising upwards of $125 million for its fourth fund, according to a regulatory filing. Stanford Group Co. is serving as a placement agent.

Key Capital Corp. has raised nearly $60 million for a secondary fund that will acquire direct interests in small private equity transactions, according to a regulatory filing.

Sciens Capital Management of New York has completed its acquisition of the institutional investment management business of London-based Atlas Capital Associates Ltd. No financial terms were disclosed.

Human Resources

Julian Masters and Tom Shelford have joined Bowmark Capital as a partner and investment director, respectively. Masters was previously with European Capital, while Shelford was previously with Nomura Private Equity. Bowmark is a UK-based private equity firm focused on the middle markets.

Constance Jay has joined European private equity firm Argos Soditic as head of investor relations. She previously was with London-based fund placement firm Acanthus Advisors.

Anthony Cuti, former CEO of Duane Reade Holdings Inc., pled not guilty Friday to charges of securities fraud, conspiracy and charges of making false statements to securities regulators. According to prosecutors, Cuti’s crimes included providing false financial information to Oak Hill Capital Partners, when the firm was taking the company private in 2004.